Despite pressures from political parties to increase more public spending especially on education, social welfare and health, the Financial Secretary Donald Tsang Yam-kuen does not hike major tax rates and insists on balancing the books. Fiscal prudence is still emphasized.

As the public sector spending is projected to be 21.4% of GDP, much higher than about 16% in early 1990s, we are concerned about the inertia in containing the size of public spending. There is room for reduction as the government should consider more enhanced productivity measures and privatise public enterprises such as the KCR, Harbour Tunnel and Airport Authority.

It is somewhat disappointing that the government has not introduced any concrete measures to support the small and medium sized enterprises, except staff training concession, and lower Hong Kong's cost of doing business.

It is also inadequate that the budget does not adopt any tax reduction measures to boost consumption and sharpen Hong Kong's competitive edge over rivals. As falling overseas demand has hurt exports, economic growth will probably slow this year to about 3.8 percent from an estimated 10.5 percent last year.

It is positive that the Financial Secretary has excised restraints not to put forward any indirect tax measures, in particular the sales tax and border tax schemes. Fortunately, with the abundant fiscal reserves and the mainland's imminent membership of the World Trade Organisation expected to give the SAR's economy a hefty lift in coming years, the book-balancing takes on a decidedly less-urgent appearance. However, the government should consider reform its tax system to deal with the narrow tax base issues in the medium term.